4 ms·

(Author here) S corps have to pay the owners a reasonable salary on W-2. The benefit is being able to determine how much SE tax you pay.

by zrail 8y ago

sheeshkebab 8y ago
I see... I’ve been using llc’s without s corp for all my consulting and side projects for a while (easy to start and kill them off). It looks like S corp does add quite a bit of overhead though - although maybe it lowers taxes? Is that the reason?
- zrail 8y ago
  You can significantly lower your SE taxes due (Social Security and Medicare) by giving yourself a salary lower than your profit. This comes at a cost of additional overhead (payroll and an accountant to prep the tax form, which is not a DIY project for at least the first year). There’s a threshold of about $100k profit where this begins to make sense.
- MatthewMcDonald 8y ago
  It can lower your tax liability significantly. Mr Money Mustache has an article that covers some potential benefits: https://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/ https://www.mrmoneymustache.com/2016/02/10/should-you-do-you...
tptacek 8y ago
It's pretty fucked up that people do this, and if running this particular tax dodge complicates people's lives, God bless the bureaucracy. You should not get to underpay payroll taxes, roping off a big chunk of your income as "profit sharing", simply because you happen to own an S-Corp. I've heard this is a big audit flag, but even if it wasn't, I think doing it is pretty close to immoral.
- zrail 8y ago
  First, there are no morals involved in taxes. I don’t make the tax laws and I have no responsibility to pay more tax than I owe. If Congress wanted to close this then they would. I believe it was a plank of Hillary’s campaign. Second, there’s a very narrow window where it actually makes sense. Above $128k of salary you don’t pay Social Security tax at all, just Medicare. “Underpaying” social security reduces your future annuity, so it’s not like this is a panacea. Third, paying yourself zero salary and taking profit sharing distributions is indeed a massive audit risk. I’ve never done that and don’t ever plan on it (see: article title).
  - tptacek 8y ago
    Right: that narrow window is what makes it so crazy-making. Virtually everybody who employs this dodge is comparatively privileged. Most people don't get to opt a big chunk of their income out of Medicare/Social Security taxes; why should tech company operators? We're an LLC filing as S-Corp, for what it's worth. I just don't play this particular game.
    - zrail 8y ago
      I am all for Congress removing this as a benefit of S corps and simultaneously removing or significantly lifting the Social Security wage cap. That’s a thing I would vote for. Until it happens, though, people are going to continue doing this. Congress removed a similar dodge for C corps almost 80 years ago, so it can certainly be done. S corps aren’t just used by consultants, FWIW. The structure makes a lot of sense for companies with lots of profit and more than owner employees, where the owners can justifiably claim they don’t generate all the profit from their personal services.
      - tptacek 8y ago
        The whole idea of "profit not generated from personal services" that are exempt from Medicare taxes is what's problematic. If you own a company and make six figures in income from it, you should be paying taxes on it as regular income. Medicare and Social Security already have a break for high-income earners --- the income limit you previously mentioned. I don't know that we really disagree about any of this; I'm just ranting. It upsets me that people think this is legitimate and exploit it, or that "Mr. Money Mustache" would promote it.
- tunesmith 8y ago
  In the past, the "reasonable salary" requirement wasn't even there, the guideline was something else along the lines of distributions being triple the salary or less. The IRS came out with the "reasonable salary" thing after that point, which suggests to me that as long as people are paying themselves a reasonable salary, the IRS does not see this as an abuse of any sort. If you want to consider it immoral compared to your own values, go for it, but it's pretty mean to call it a "tax dodge", or fucked up for others to do it. Just for a data point - I had a few years of ignoring distributions, and shopped around last year for different accountants. I talked to five, and every single one of them recommended I shrink my salary to "reasonable" and pay myself more distribution. It is not a shady practice.

(Author here) S corps have to pay the owners a reasonable salary on W-2. The benefit is being able to determine how much SE tax you pay.

by zrail 8y ago

(Author here) S corps have to pay the owners a reasonable salary on W-2. The benefit is being able to determine how much SE tax you pay.

sheeshkebab 8y ago

I see... I’ve been using llc’s without s corp for all my consulting and side projects for a while (easy to start and kill them off). It looks like S corp does add quite a bit of overhead though - although maybe it lowers taxes? Is that the reason?

zrail 8y ago
You can significantly lower your SE taxes due (Social Security and Medicare) by giving yourself a salary lower than your profit. This comes at a cost of additional overhead (payroll and an accountant to prep the tax form, which is not a DIY project for at least the first year). There’s a threshold of about $100k profit where this begins to make sense.
MatthewMcDonald 8y ago
It can lower your tax liability significantly. Mr Money Mustache has an article that covers some potential benefits: https://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/ https://www.mrmoneymustache.com/2016/02/10/should-you-do-you...

tptacek 8y ago

It's pretty fucked up that people do this, and if running this particular tax dodge complicates people's lives, God bless the bureaucracy. You should not get to underpay payroll taxes, roping off a big chunk of your income as "profit sharing", simply because you happen to own an S-Corp. I've heard this is a big audit flag, but even if it wasn't, I think doing it is pretty close to immoral.

zrail 8y ago
First, there are no morals involved in taxes. I don’t make the tax laws and I have no responsibility to pay more tax than I owe. If Congress wanted to close this then they would. I believe it was a plank of Hillary’s campaign. Second, there’s a very narrow window where it actually makes sense. Above $128k of salary you don’t pay Social Security tax at all, just Medicare. “Underpaying” social security reduces your future annuity, so it’s not like this is a panacea. Third, paying yourself zero salary and taking profit sharing distributions is indeed a massive audit risk. I’ve never done that and don’t ever plan on it (see: article title).
- tptacek 8y ago
  Right: that narrow window is what makes it so crazy-making. Virtually everybody who employs this dodge is comparatively privileged. Most people don't get to opt a big chunk of their income out of Medicare/Social Security taxes; why should tech company operators? We're an LLC filing as S-Corp, for what it's worth. I just don't play this particular game.
  - zrail 8y ago
    I am all for Congress removing this as a benefit of S corps and simultaneously removing or significantly lifting the Social Security wage cap. That’s a thing I would vote for. Until it happens, though, people are going to continue doing this. Congress removed a similar dodge for C corps almost 80 years ago, so it can certainly be done. S corps aren’t just used by consultants, FWIW. The structure makes a lot of sense for companies with lots of profit and more than owner employees, where the owners can justifiably claim they don’t generate all the profit from their personal services.
    - tptacek 8y ago
      The whole idea of "profit not generated from personal services" that are exempt from Medicare taxes is what's problematic. If you own a company and make six figures in income from it, you should be paying taxes on it as regular income. Medicare and Social Security already have a break for high-income earners --- the income limit you previously mentioned. I don't know that we really disagree about any of this; I'm just ranting. It upsets me that people think this is legitimate and exploit it, or that "Mr. Money Mustache" would promote it.
tunesmith 8y ago
In the past, the "reasonable salary" requirement wasn't even there, the guideline was something else along the lines of distributions being triple the salary or less. The IRS came out with the "reasonable salary" thing after that point, which suggests to me that as long as people are paying themselves a reasonable salary, the IRS does not see this as an abuse of any sort. If you want to consider it immoral compared to your own values, go for it, but it's pretty mean to call it a "tax dodge", or fucked up for others to do it. Just for a data point - I had a few years of ignoring distributions, and shopped around last year for different accountants. I talked to five, and every single one of them recommended I shrink my salary to "reasonable" and pay myself more distribution. It is not a shady practice.